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Government extraction and firm size: Local officials’ responses to fiscal distress in China

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  • Liu, Yu

Abstract

This paper studies how government extraction behaviors respond to local fiscal distress in China. We exploit the 2002 Chinese Income Tax Reform which exogenously cut local government revenues from income taxes roughly by half. We find that, when facing fiscal distress, local officials resort to informal taxes, such as fees and levies, instead of formal taxes to supplement revenue. On average, the increase in informal taxes recovered 75 percent of the local government revenue loss due to the reform. The increases are more pronounced along the intensive margin and are primarily driven by more extractions from large firms. We also find that the reform led to reductions in investment and growth rates of small firms and consistently more small firms in the total size distribution.

Suggested Citation

  • Liu, Yu, 2018. "Government extraction and firm size: Local officials’ responses to fiscal distress in China," Journal of Comparative Economics, Elsevier, vol. 46(4), pages 1310-1331.
    • Handle: RePEc:eee:jcecon:v:46:y:2018:i:4:p:1310-1331
    DOI: 10.1016/j.jce.2018.09.002
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    More about this item

    Keywords

    Government extraction; Informal tax; Firm size; 2002 Chinese Income Tax Reform;
    All these keywords.

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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